Demand for Consumer Goods Will Increase

The Great Recession ended more than four years ago, but unlike the past recoveries from previous recessions, the American economy has struggled to gain its footing. The persistent problem has been that the rate of economic growth in the U.S. during the past four-plus years has been a sub-par 2%.

Most of us believe that a rate of at least 3% per year over the long term is optimal, and the growth rates typically go much higher than that in the early stages of a recovery from a recession. The main problem with an economy that only grows at a rate of 2% is that it does not create enough jobs for its expanding population. That results in stagnant income growth, which in turn yields restrained spending. And slow spending results in slow economic growth. It is a vicious cycle.

Sluggish income growth is the reason that U.S. consumers are not increasing their rate of spending. Households have paid down their credit card debt, and a substantial number of the lucky ones have been able to refinance their home mortgages at rates that are very near historical lows. However, they have not been willing to raise their spending activity back to the pre-recession levels. This lack of final demand has been felt by all segments of the manufacturing sector, especially moldmakers.

However,  this situation is gradually improving, and an increasing number of indicators suggest that spending activity will accelerate in the coming months. One sector that has already experienced a nice increase in demand is the auto sector. A large chunk of the market for new cars is replacement  demand. The average age of an automobile in the U.S. is at an all-time high.

Over half of the cars currently on the road are valued at less than $2,500, and their owners are not even carrying comprehensive insurance on them. In other words, they are one pothole away from the scrap heap. Consumers may have slowed their spending as a result of slow income growth, but there is an increasing number of cars being replaced because they have to be replaced; and, this is true for many types of consumer durable goods.

The markets for appliances, home furnishings and consumer electronics are also starting to experience the release of some pent-up demand. The residential construction sector is already into full recovery mode, and many of these goods will now start to be purchased for use in newly built or remodeled homes. Also an improving residential construction sector creates a large number of jobs, it pushes up home values, and it creates a favorable lending environment for banks.

All of these conditions favor spending on durable goods, and all of them are becoming more prevalent at the present time. As spending increases, the growth in the economy will accelerate and this trend will result in business managers becoming increasingly confident in hiring new workers. This will push up income growth which will in turn result in even more spending. It will become a virtuous circle. And we are nearing the start of it.